Webster Financial Corporation

Good morning. Welcome to the Webster Financial Corporation second quarter 2022 earnings call. Please note this event is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Comments made by Webster Financial's management team may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the Safe Harbor rules. Please review the forward-looking disclaimer in Safe Harbor language in today's press release and presentation for more information about the risks and uncertainties which may affect us. The presentation accompanying management's remarks can be found on the company's investor relations site at investors.websterbank.com. I will now turn the call over to Webster Financial's Chief Executive Officer, John Sciula. Mr. Sciula, please go ahead.

Thank you, Chantel. Good morning, and thanks for joining us for our second quarter earnings call. I'm excited to be speaking with you this morning on our quarterly results, as I think they are a great illustration of the potential of our company, the quality of our execution, the team we put together, and our colleagues' focus and dedication as we progress through the integration. I'm going to start with a high-level overview of our financial performance in the quarter, review the progress of our integration and other strategic initiatives, and then I'll turn it over to Glenn for a review of the quarter's results and the outlook. I'll wrap it up at the end with a few additional comments, including some perspectives on the uncertain macroeconomic environment. I'm on slide two. As I mentioned just a moment ago, the second quarter is a great reflection of Webster's The earnings power of our new company is materializing in the first full quarter following the close of our merger with Sterling. We exhibited strong and diverse loan growth. The quality of our core deposit franchise led by HSA Bank and our consumer banking team was a rising rate environment, and we maintained an advantageous capital position. On an adjusted basis, eliminating one-time merger-related costs, we generated EPS of $1.29 with a return on assets of 1.41% and a return on tangible common equity of 18.5%. Our efficiency ratio was 45% as we continue to execute on the synergies our merger provides and leverage the diverse competencies of our company. Our loans and total assets grew 4.8% and 3.8% respectively in the quarter. Loan growth was generated across broad industry sectors, business lines, geographies, and asset classes, and our asset quality metrics remain favorable. With expanded geography and a growing number of industry verticals, our talented colleagues can continue to safely and prudently grow loans. The rationale behind this merger of equals was and is relatively straightforward, as I've stated several times. We have created a company with an incredibly diverse funding profile, including our HSA bank franchise. We have a proven track record of growing loans, across a broad set of asset classes and geographies at or above market growth rates. With a bigger balance sheet to deepen our relationships with existing sponsors and businesses, we materially improve our ability to drive net interest income, capital markets revenue, and swap and cash management fees. In 2Q, we saw early proof points validating the power of combining the two companies. On slide three, while we continue to achieve key milestones in the integration, Our colleagues also remain laser-focused on our clients and maintaining the day-to-day operations of the bank and revenue momentum. Our ability to do both was evident in this quarter. We remain confident in our ability to achieve or exceed the key merger financial metrics we set forth at deal announcement over a year ago, including 8% to 10% annual loan growth, $120 million in expense saves over the first two years, and completion of our technology conversion by mid-2023. While we continue to manage expenses and look for synergistic opportunities, we remain focused on profitable growth and will not shy away from investments in our differentiated high return businesses that will add franchise value and economic profit over time. We continue to see opportunities to attract key talent and launch initiatives across all of our high performing business lines. In the second quarter, we began to consolidate several back office systems including mortgage servicing, treasury management, and payroll. We finalized the structure of our executive management team, and we're making great progress on the corporate office consolidations we outlined last quarter. Finally, given our increased scale, we have been able to formally establish an office of corporate responsibility to oversee the company's community investment, philanthropy efforts, and sustainability work. Collectively, we have the ability to provide more for our communities, In the quarter, we announced a $6.5 billion three-year community investment program that includes investment in affordable housing and community development, small business lending, and other philanthropic and community engagement efforts. With that, I'm going to turn it over to Glenn to review our financial performance for the quarter.

Thanks, John, and good morning, everyone. I will start with the reconciliation of core earnings on slide four. We've reported GAAP net income to common shareholders of $178 million with EPS of $1. As John noted, on an adjusted basis, we reported net income to common shareholders of $229 million and EPS of $1.29, which excluded one-time after-tax expenses of $50 million. The one-time charges were related to real estate consolidation, severance, and other merger and integration charges. Next, I'll review the balance sheet trends before moving on to the income statement. On slide 5, Our total assets were $67.6 billion, with total loans of $45.6 billion and total deposits of $53.1 billion. As you see, we delivered strong loan growth on a quarter-over-quarter basis in commercial and consumer categories. The linked quarter decline in deposits was primarily due to a seasonal effect of public funds, which I'll cover in more detail on a later slide. On slide six, we highlighted the diversity of our loan growth. which is an illustration of the potential of Webster's post-merger business mix. In total, we grew loans $2.1 billion, or 4.8% on a linked quarter basis. By category, the largest contributors to the increase were C&I with $603 million, commercial real estate with $557 million, and residential mortgages with $426 million. Switching to the deposits on slide 7, total deposit balances declined by $1.3 billion, or 2.4% relative to prior quarter. The primary driver was a seasonal decline in public funds, with balances down $1.2 billion. We expect to see a reversal in the third quarter as tax collections drive higher liquidity at public entities. Short-term borrowings will leverage the fund growth in the quarter. A portion of the borrowings will be paid down as public funds rebuild, and we continue to gather new deposits. HSA deposits were effectively flat on a quarter and up 6.2% year-over-year. Excluding third-party administered accounts, deposits increased 8.4% year-over-year. The impact of TPA runoff on an overall growth is becoming much less significant as that book mirrors an end state. Additional detail for the HSA bank is on slide 19 in the appendix. Beginning on slide 8, I'll review the details of our income statement. We provided our reported to adjusted income statement by line item and compared our adjusted earnings to pro forma first quarter earnings. Notably, on an adjusted basis, each of the major line items of our income statement exhibited improvement on a quarter-over-quarter basis when compared to the aggregated results of Sterling and Webster last quarter. I'll cover the individual line items in more detail in subsequent slides. Our pre-provisioned net revenue on adjusted basis was $316 million, up $39 million when compared to the combined first quarter results. Net interest margin was 3.28% on a reported basis, and our combined efficiency ratio is now 45%. On slide 9, net interest income grew by $22.8 million relative to the pro forma first quarter. Adjusting for accretion in both periods, net interest income was up $29.9 million quarter over quarter. Net interest margin, excluding accretion income, increased 11 basis points to 3.09%. Given the current forward curve, we expect further expansion to our core net interest margin throughout the year. As illustrated on an earlier slide, the cost of deposits increased two basis points quarter over quarter. We expect deposit pricing in certain categories will start to move more materially in the future quarters with subsequent Fed actions. On a year-over-year basis, deposit costs were flat. On slide 10, we show our fee income for the quarter and on a year-over-year basis. Fees were up $6 million linked quarter and $18 million year-over-year. The improvement in fee income was driven primarily by customer interest rate hedging activity in the commercial bank. Year-over-year improvement was also driven by increased deposit-related fees as transaction activity increased relative to pandemic-impacted periods. Slide 11 summarizes non-interest expense. We reported adjusted expense of $292 million relative to $302 million on adjusted pro forma expense last quarter. The decline is driven by the initiatives John outlined in his integration update, including the finalization of the org structure, corporate real estate consolidation, and the elimination of duplicate systems and vendors. Slide 12 highlights our allowance for credit losses, where we reported provision expense of $12 million and a $2 million increase in our allowance, driven by loan growth. The provision expense also reflects an improvement in individual credit performance and loan mix, which was partially offset by a modestly lower outlook on macroeconomic variables. As a result, the allowance coverage ratio fell as a percent of loans to 1.25%. As highlighted on slide 13, you can see the underlying credit metrics remain strong. We reported length quarter declines in both non-performing assets and classified loans, down $1 million and $41 million respectively. I would also note our delinquencies declined to $52 million from $71 million last quarter. Debt charge-offs of nine basis points declined one basis point from last quarter and remain at low levels. Slide 14 highlights our strong capital levels. All capital ratios remain well in excess of regulatory and internal targets. Consistent with our previously stated capital targets, we repurchased over 2 million shares in the quarter and will continue to be opportunistic with repurchases going forward. The net of all capital effects this quarter resulted in a slight decline in our tangible book value per share, which decreased to $28.31, primarily driven by AOCI losses, the share repurchases, and partially offset by our strong earnings. Our common equity Tier 1 ratio remains strong at 11.04%. It's still well above our minimum term operating target of 10.5%. We anticipate we will prudently and opportunistically return capital to shareholders, given the strong internal capital generation from improving profitability, sound underwriting credit metrics, and the ample reserve on our marked and well-diligenced loan portfolio. I'll wrap up my comments with a refresh on our outlook for the full year 2022. We are increasing our guidance on net interest income to $1.9 billion, driven by our projections for the rate environment and strong loan growth. This full-year outlook excludes $90 million of realized and scheduled purchase accounting accretion. The details of which can be found on slide 28 in the appendix. Our projections assume a Fed funds rate ends the year at 3.25%, implying another 150 basis points of rate increases. And as a reminder, our interest income outlook is on a non-FTE basis. We now expect loan growth to be near the top end of our 8% to 10% range. Fees should be in the range of $430 to $450 million. We continue to feel confident in achieving our full-year adjusted expense target of $1.1 to $1.12 billion. That being said, we will continue to monitor inflationary headwinds and, of course, continue to invest in our businesses. And we are forecasting an effective tax rate of 23% to 24%. With that, I'll turn things back over to John for closing remarks.